BGR Energy Systems 3QFY2014 performance highlights and results update

For 3QFY2014, BGR Energy Systems (BGR)’s top-line and bottom-line performance was below our expectations. The company reported a subdued 3.8% yoy growth in top-line to Rs.836cr. The Capital goods segment’s revenue declined by 19.8% yoy to Rs.47cr while the Construction and EPC segment grew by 5.7% yoy to Rs.789cr. The bulk of the revenues were contributed by execution of TRN Energy, Krishnapatnam, Chandrapur and Marwa projects.

Revenue mix skewed in favor of EPC segment; drags down OPM: Since revenue mix was skewed in favor of the EPC segment (compared to higher margin BOP segment) and on account of EBIT level losses in the Capital goods segment, the OPM contracted by 158bp yoy to 12.2%. Further, other income also reduced from Rs.5.5cr to Rs.0.4cr. Consequently, the net profit declined by 14.6% yoy to Rs.35cr.

Order book: BGR Energy reported an 11.0% yoy decline in order backlog to Rs.12,078cr as no new orders were booked during 3QFY2014. The company is expected to bid for upcoming BTG tenders from NTPC, MahaGenco and APGenco. Although the company has an order book to sales ratio of 3.4x, we remain cautious on account of longer execution cycle of existing projects. Further, margin pressure remains a concern since the company has bid aggressively for some of the orders.

Outlook and Valuation: BGR's working capital which had been witnessing continuous deterioration over the last 2 years, mainly due to high receivables, which has led to higher working capital borrowings. The Management is hopeful of bringing down its working capital borrowings by Rs.250cr by the end of FY2014 and thus, bring down its interest cost. At the current market price, the stock is trading at an attractive valuation of 5.3x on our FY2015E EPS. Hence, we recommend Accumulate on the stock with a target price of Rs.115.